Fixed or Adjustable?

Interest rates are one of the single biggest factors when choosing a mortgage. Generally, the lower the interest rate is, the better the mortgage is, but it really depends on the type of mortgage you choose and such factors as the loan to value ratio, and the fees and points charged by the lender.

There are two basic types of mortgages: those with fixed rates and those with adjustable rates. A variation on both is a balloon/reset mortgage, which offers some features of each.

• Fixed-Rate Mortgages
  
  The interest rate for a fixed-rate mortgage never changes for the life of the loan, so your monthly principal and interest payment always stay the same.
• Adjustable-Rate Mortgages (ARMs)
  
  ARMs usually start with a low interest rate. After the initial period when the interest rate doesn't change, the interest rate will often adjust each year. This means your principal and interest rate payment could increase or decrease over time.

What type of mortgage rate should you choose

If you plan to keep your home for five or more years, a fixed-rate mortgage will likely be the best option for you.

If you expect to move within the next four years, or you're confident your income will increase steadily over time and you want to start with a lower monthly payment, an adjustable-rate mortgage may make sense. ARMs usually start with lower interest rates - and that means lower monthly payments at first. But keep in mind that ARM interest rates can go up over time - and so can your payments.